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Credit Default Swap or CDS - a type of swap which purpose is transferring the credit exposure of fixed income products between parties. It works like an insurance policy, where protection buyer who makes fixed periodic payments, and a protection seller, who collects the premium in exchange for making the protection buyer whole in case of default. Most of CDSs are traded via OTC as single derivatives or index derivatives like iTraxx / Markit CDX

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CVA as a running spread - risk annuity calculation in the Monte Carlo framework

This only produces an approximation. As per Gregory (page 256) However, adding a spread to a contract such as a swap, the problem is non-linear since the spread itself will have an impact on th …
AfterWorkGuinness's user avatar
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1 answer
350 views

Explain equation to calculate CDS spread

I've come across this equation in a text and can't figure out what part of it is doing. (Using quarterly installments) $\frac{1}{4*10^4}s^t \sum\limits_{u=1}^{4t} p_{0.25u}[(1-\pi_{0.25u}) + \frac{ …
AfterWorkGuinness's user avatar
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2 answers
1k views

How does tranching cause leverage?

I've read that leverage is created with the tranches of a CDS index because the more junior tranches have more risk than the index. …
AfterWorkGuinness's user avatar